Show that in a symmetric oligopoly where the firms’ technologies satisfy assumption 5.1 , the first-best outcome can be achieved by a tax on emissions and a subsidy on output. Determine the optimal levels of the tax and the subsidy.

assumption 5.1

Transcribed Image Text:

Assumption 5.1 The cost function C(x,e) is twice continuously differentiable with C()>0, and for any production level x there is an emission level er such that C(x,e) = 0. Furthermore C(x,e) <0 Ve